Corporate Finance Chp 2 & 4
Which one of the following statements is correct concerning a corporation with taxable income of $125,000?
An increase in depreciation will increase the operating cash flow.
Which one of the following is the financial statement that shows the accounting value of a firm's equity as of a particular date?
Balance Sheet
Which of the following are current assets? I. patent II. Inventory III. accounts payable IV. cash
Inventory and Cash
Which one of the following statements related to an income statement is correct?
Taxes reduce both net income and operating cash flow.
Which one of the following correctly defines the retention ratio?
addition to retained earnings divided by net income
The higher the degree of financial leverage employed by a firm, the:
higher the probability that the firm will encounter financial distress.
Which one of the following is NOT included in cash flow from assets?
interest expense
Shareholders' equity:
represents the residual value of a firm
If a firm equates its pro forma sales growth to the rate of sustainable growth, and has positive net income and excess capacity, then the:
retained earnings will increase.
When constructing a pro forma statement, net working capital generally:
varies proportionally with sales.
The external financing need:
will limit growth if unfunded.
Which of the following are included in current liabilities? I. note payable to a supplier in eight months II. amount due from a customer next month III. account payable to a supplier that is due next week IV. loan payable to the bank in fourteen months
I and III
The cash flow related to interest payments less any net new borrowing is called the:
cash flow to creditors
Financial planning:
considers multiple options and scenarios for the next two to five years.
Which one of the following is included in a firm's market value but yet is excluded from the firm's accounting value?
good reputation of the company
Depreciation:
reduces both taxes and net income.
As of 2011, which one of the following statements concerning U.S. corporate income taxes is correct?
A firm's tax is computed on an incremental basis.
Which one of the following statements concerning financial planning for a firm is correct?
Financial plans often contain alternative options based on economic developments.
Which of the following can affect a firm's sustainable rate of growth? I. capital intensity ratio II. profit margin III. dividend policy IV. debt-equity ratio
I, II, III, and IV
Which one of the following is the financial statement that summarizes a firm's revenue and expenses over a period of time?
Income Statement
Which one of the following is correct in relation to pro forma statements?
Inventory changes are directly proportional to sales changes.
Which one of the following statements related to liquidity is correct?
Liquid assets are valuable to a firm.
Which term relates to the cash flow which results from a firm's ongoing, normal business activities?
Operating Cash Flow
Which one of the following statements is correct?
Pro forma statements are projections, not guarantees.
Which one of the following statements related to taxes is correct?
The marginal tax rate for a firm can be either higher or lower than the average tax rate.
You are comparing the current income statement of a firm to the pro forma income statement for next year. The pro forma is based on a four percent increase in sales. The firm is currently operating at 85 percent of capacity. Net working capital and all costs vary directly with sales. The tax rate and the dividend payout ratio are fixed. Given this information, which one of the following statements must be true?
Total assets will increase by less than four percent.
The sustainable growth rate:
assumes the debt-equity ratio is 1.0.
Which one of the following ratios identifies the amount of assets a firm needs in order to generate $1 in sales?
capital intensity ratio
The financial planning process tends to place the least emphasis on which one of the following?
capital structure of a firm
The cash flow of a firm which is available for distribution to the firm's creditors and stockholders is called the:
cash flow from assets OR free cash flow
Net working capital is defined as:
current assets minus current liabilities
Which one of the following will increase the cash flow from assets, all else equal?
decrease in net capital spending
Which one of the following will increase the maximum rate of growth a corporation can achieve?
decrease in the dividend payout ratio
For a tax-paying firm, an increase in _____ will cause the cash flow from assets to increase.
depreciation
Noncash items refer to:
expenses which do not directly affect cash flows; such as depreciation
A pro forma statement indicates that both sales and fixed assets are projected to increase by 7 percent over their current levels. Given this, you can safely assume that the firm:
is currently operating at full capacity.
Net capital spending:
is equal to zero if the decrease in the net fixed assets is equal to the depreciation expense.
The percentage of the next dollar you earn that must be paid in taxes is referred to as the _____ tax rate.
marginal
Which one of the following terms is applied to the financial planning method which uses the projected sales level as the basis for determining changes in balance sheet and income statement account values?
percentage of sales method
You are getting ready to prepare pro forma statements for your business. Which one of the following are you most apt to estimate first as you begin this process?
sales forecast
Which one of the following represents the most liquid asset?
$100 of inventory that is sold today for $100 cash
Cash flow from assets is also known as the firm's:
Free Cash Flow
Which one of the following must be true if a firm had a negative cash flow from assets?
The firm utilized outside funding.
The book value of a firm is:
based on historical cost
A firm is currently operating at full capacity. Net working capital, costs, and all assets vary directly with sales. The firm does not wish to obtain any additional equity financing. The dividend payout ratio is constant at 40 percent. If the firm has a positive external financing need, that need will be met by:
long-term debt.
The sustainable growth rate of a firm is best described as the:
maximum growth rate achievable excluding any external equity financing while maintaining a constant debt-equity ratio
Which one of the following capital intensity ratios indicates the largest need for fixed assets per dollar of sales?
1.15
Which one of the following statements concerning net working capital is correct?
A decrease in the cash balance also decreases net working capital
Which one of the following statements related to the cash flow to creditors is correct?
A positive cash flow to creditors represents a net cash outflow from the firm.
Which one of the following is true according to Generally Accepted Accounting Principles?
Costs of goods sold are recorded based on the matching principle.
The common set of standards and procedures by which audited financial statements are prepared is known as the:
Generally Accepted Accounting Priciples
Which of the following are expenses for accounting purposes but are not operating cash flows for financial purposes? I. interest expense II. taxes III. costs of goods sold IV. depreciation
I and IV only
Financial planning accomplishes which of the following for a firm? I. determination of asset requirements II. development of plans to contend with unexpected events III. establishment of priorities IV. analysis of funding options
I, II, III, and IV
Which of the following questions are appropriate to address during the financial planning process? I. Should the firm merge with a competitor? II. Should additional shares of stock be sold? III. Should a particular division be sold? IV. Should a new product be introduced?
I, II, III, and IV
You are developing a financial plan for a corporation. Which of the following questions will be considered as you develop this plan? I. How much net working capital will be needed? II. Will additional fixed assets be required? III. Will dividends be paid to shareholders? IV. How much new debt must be obtained?
I, II, III, and IV
Which of the following are needed to determine the amount of fixed assets required to support each dollar of sales? I. current amount of fixed assets II. current sales III. current level of operating capacity IV. projected growth rate of sales
I, II, and III only
The financial planning process: I. involves internal negotiations among divisions. II. quantifies senior manager's goals. III. considers only internal factors. IV. reconciles company activities across divisions.
I, II, and IV only
Which of the following are included in the market value of a firm but are excluded from the firm's book value? I. value of management skills II. value of a copyright III. value of the firm's reputation IV. value of employee's experience
I, III, and IV only
An increase in the depreciation expense will do which of the following? I. increase net income II. decrease net income III. increase the cash flow from assets IV. decrease the cash flow from assets
II and III
When utilizing the percentage of sales approach, managers: I. estimate company sales based on a desired level of net income and the current profit margin. II. consider only those assets that vary directly with sales. III. consider the current production capacity level. IV. can project both net income and net cash flows.
III and IV only
Which one of the following statements concerning net working capital is correct?
Net working capital increases when inventory is sold for cash at a profit.
A positive cash flow to stockholders indicates which one of the following with certainty?
The dividends paid exceeded the net new equity raised.
A firm's net working capital and all of its expenses vary directly with sales. The firm is operating currently at 96 percent of capacity. The firm wants no additional external financing of any kind. Which one of the following statements related to the firm's pro forma statements for next year must be correct?
The firm cannot exceed its internal rate of growth.
Which one of the following statements related to an income statement is correct? Assume accrual accounting is used.
The labor costs for producing a product are expensed when the product is sold.
Martin Aerospace is currently operating at full capacity based on its current level of assets. Sales are expected to increase by 4.5 percent next year, which is the firm's internal rate of growth. Net working capital and operating costs are expected to increase directly with sales. The interest expense will remain constant at its current level. The tax rate and the dividend payout ratio will be held constant. Current and projected net income is positive. Which one of the following statements is correct regarding the pro forma statement for next year?
Total assets will increase at the same rate as sales.
Which one of the following accounts is the most liquid?
accounts receivable
Atlas Industries combines the smaller investment proposals from each operational unit into a single project for planning purposes. This process is referred to as which one of the following?
aggregation
The _____ tax rate is equal to total taxes divided by total taxable income.
average
You recently purchased a grocery store. At the time of the purchase, the store's market value equaled its book value. The purchase included the building, the fixtures, and the inventory. Which one of the following is most apt to cause the market value of this store to be lower than the book value?
construction of a new restricted access highway located between the store and the surrounding residential areas
A firm's external financing need is financed by which of the following?
debt or equity
All else constant, which one of the following will increase the internal rate of growth?
decrease in total assets
Which one of the following costs is most apt to be a fixed cost?
depreciation
A Procrustes approach to financial planning is based on:
developing a plan around the goals of senior managers.
Cash flow to stockholders is defined as:
dividend payments less net new equity raised
Which one of the following terms is defined as dividends paid expressed as a percentage of net income?
dividend payout ratio
Which one of the following policies most directly affects the projection of the retained earnings balance to be used on a pro forma statement?
dividend policy
Which one of the following will cause the sustainable growth rate to equal to internal growth rate?
equity multiplier of 1.0
A firm is operating at 90 percent of capacity. This information is primarily needed to project which one of the following account values when compiling pro forma statements?
fixed assets
Blasco Industries is currently at full-capacity sales. Which one of the following is limiting sales to this level?
fixed assets
Sales can often increase without increasing which one of the following?
fixed assets
The internal growth rate of a firm is best described as the:
maximum growth rate achievable excluding external financing of any kind.
Which one of these is most apt to be a fixed cost?
office salaries
Phil is working on a financial plan for the next three years. This time period is referred to as which one of the following?
planning horizon
Financial plans generally tend to ignore which one of the following?
risks associated with cash flows
Which one of the following will increase the value of a firm's net working capital?
selling inventory at a profit
Sal's Pizza has a dividend payout ratio of 10 percent. The firm does not want to issue additional equity shares but does want to maintain its current debt-equity ratio and its current dividend policy. The firm is profitable. Which one of the following defines the maximum rate at which this firm can grow?
sustainable growth rate
The plowback ratio is:
the percentage of net income available to the firm to fund future growth.
Which one of the following is classified as an intangible fixed asset?
trademark